25th January 2024Gifts out of surplus income – Three rules to remember

Making gifts throughout your lifetime is an effective way to ensure that you are leaving as much behind to your loved ones as possible whilst also helping to mitigate your exposure to Inheritance Tax. In this regard, there is an annual exemption of £3,000 which can be rolled forward up to one tax year. For marriage or civil partnership celebrations, you can give up to £5,000 depending on your relationship to the giftee.

In addition, small gifts of up to £250 can be made to anyone free of Inheritance Tax.

You can also make gifts out of surplus income Stevie Heafford, Tax Partner at HW Fisher explains the three rules to keep in mind.

What is surplus income?

Surplus income is any income that is leftover once all of your outgoings have been paid. Remember your income isn’t only employment earnings and pension payments, it also includes any monies that you receive in the form of interest, ISAs, dividends and rental income.

If you can afford to make regular financial gifts without it affecting your everyday lifestyle, the most common next step is to set up a regular payment plan through your bank.

What qualifies as a gift out of surplus income?

There are three rules that you need to follow to make sure that your gift out of surplus income will be exempt from Inheritance Tax.

  1. The gifts must be made out of your income
  2. They must be paid on a regular basis and become part of your ‘normal expenditure’
  3. Making these gifts should not impact your current standard of living

Top tips

  • Make sure you are correctly calculating your income – Missing any of the applicable earnings when calculating your total income can be a costly mistake for your giftee, who could be liable to pay up to 40% of the amount gifted in Inheritance Tax. Be aware that the tax free 5% annual withdrawals from an investment bond do not count as income for this purpose.
  • Keep a file of your all payments and your income history – This will be helpful evidence that your giftee can present to HMRC should they question your Inheritance Tax liabilities when you pass away. It is also recommended that before your first payment, you write a letter of intent to the recipient of your financial gifts, outlining that they are being made out of surplus income, as this is another reference that can be given to HMRC on your death.

If you’d like to speak to Stevie and discuss your own circumstances, you can get in touch here.

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